Evaluating Balanced Mutual Funds
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Evaluating Balanced Mutual Funds
There are several ways to measure the performance of a balanced mutual fund.
Things To Know
- Consider returns, costs, and turnover.
Evaluate returns and volatility
The first things to look at are a fund’s total return and its volatility (tendency to fluctuate in value) as compared to other balanced funds. A fund’s total return is its income combined with the increase or decrease in its net asset value (NAV). Typically, a balanced fund’s return will be more stable over a five- or ten-year period than will that of a pure growth fund. It should also show less volatility than a pure stock fund and higher returns than most bond funds.
Questions to ask
A fund’s current asset holdings help explain the past performance of a balanced fund. You should ask questions such as the following: Did the fund invest exclusively in Treasury bonds, or were corporate bonds included? How much cash did the fund have on hand?
Evaluate cost
Cost is also a factor affecting fund performance. These include expenses and management fees, as well as sales charges and back-end loads and fees. A fund’s expenses may include commissions and fees it pays each time the fund buys and sells securities.
Evaluate turnover
Consider a fund’s turnover, which reveals how often it sells existing assets to purchase other assets. The higher the turnover, the more transaction costs the fund may have. Large turnover can also lead to high capital gains distributions on which you may have to pay taxes. However, the fund’s turnover may be critical to achieving its investment objective.
Fees and costs are not necessarily a bad thing. If a fund you are considering has above-average total return despite above average costs, it is worth considering. Just be sure to do the math.
